Collecting Cigarette Taxes from Native American Retailers

Cayuga Indian Nation of N.Y. v. Gould, 930 N.E.2d 233 (N.Y. 2010)

Seneca Nation of Indians v. Paterson, 2010 U.S. Dist. LEXIS 109525 (W.D.N.Y. 2010) (Case No. 10-CV-687)

Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154 (2d Cir. 2011) 

Another in a series of periodic showdowns over the collection of New York State cigarette taxes for sales made to non-Native Americans by retailers on tribal reservations began as a result of a May 2010 New York Court of Appeals decision and emergency regulations enacted by the New York Department of Taxation (“Department”).

A 1976 U.S. Supreme Court ruling set the stage for ongoing conflict by holding that States may collect tax from sales of goods made by Native Americans on reservation land to non-Native American or non-members of the particular nation. Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 483 (1976).

In 1988, New York created regulations enabling the collection of taxes on cigarette sales to non-Native Americans.  The scheme allowed limited tax-free sales to tribal members by establishing an annual quota or “probable demand” for tax-free sales.   Before implementation, a group of cigarette wholesalers sued, arguing that federal regulations governed trade with Native Americans and that state tax collection was not permitted.  Ultimately, the Supreme Court held that states could collect taxes from Native American retailers if the regulations were not unduly burdensome and followed the limitations of MoeDept of Taxation v. Milhelm, 512 U.S. 61 (1994).

The Milhelm court approved “probable demand” in principle but noted that Native Americans could challenge the regulations if the demand quota was inadequate.  The court also suggested “alternative remedies” such as entering into agreement with tribes and interdiction of untaxed cigarette shipments to retailers located on reservation lands.  Despite the favorable ruling, New York never implemented the regulation, and this resulted in yet another lawsuit filed by a group of convenience store owners in 1995 to compel enforcement of the tax. Matter of New York Assn. of Convenience Stores v. Urbach, 699 N.E.2d 904 (1998).  Plaintiffs claimed the selective collection of cigarette taxes was a violation of their constitutional equal protection rights.  The lower courts agreed, and the case went to the Court of Appeals.  However before it could rule on the case, the regulations were repealed in 1998.

The Court of Appeals then returned the case to the lower courts to see if New York’s now-permanent policy of not collecting taxes from Native American retailers was a violation of other retailers’ equal protection rights.  The rational basis standard was used to determine if different treatment of the parties was appropriate in the absence of specific regulations.  In its holding that forbearance policy did not violate equal protection rights, the Appellate Division noted several factors indicating a rational basis for treating Native American retailers differently than the non-tribal retailers: Native Americans are immune to law suits for failure to collect such taxes, auditors cannot access tribal retailers’ records by visiting the reservation, tribal retailers cannot be compelled by the state to attend audits or produce their records for tax purposes, the Department had unsuccessfully attempted to negotiate an agreement, and the interdiction of shipments to Native American retailers had occasionally led to violent outcomes.  N.Y. Ass’n of Convenience Stores v. Urbach, 275 A.D.2d 520, 522 (N.Y. App. 2000).

An amended tax law was passed in 2005 (Tax Law § 471-e) by the New York legislature with a deadline to implement a new set of regulations by March 1, 2006.  The new regulations involved a coupon system also based on the probable demand framework.  Tobacco wholesalers would prepay sales taxes on all cigarettes sold regardless of whether or not the customers were Native American retailers.  The Department would then issue tax exempt coupons to the tribes equal to the probable demand of tribal members.  These coupons would be provided to wholesalers in lieu of tax payment, and the wholesalers in turn would redeem them at the Department for refunds of the prepaid taxes.

The Department declared a “policy of forbearance” from collecting the tax and never calculated the probable demand or distributed the coupons.  A preliminary injunction was granted declaring the statute unenforceable because the conditions for creating the collection system were not implemented by the March 1, 2006 effective date.  The injunction was upheld on appeal in May 2008.  Day Wholesale, Inc. v. State of N.Y., 856 N.Y.S.2d 808 (2008).

In September 2008, the Cayuga and Seneca County District Attorneys (DAs) requested assistance from the Department to prevent sales of untaxed cigarettes by two retail stores operated in their jurisdictions by the Cayuga and Seneca Nations.  The Department declined to help, citing negotiations between the Governor and the Nations to resolve the issue.  The DAs pressed ahead, issuing warrants executed by law officers who searched and confiscated from the stores unstamped (therefore untaxed) cigarettes.

One day later, before any criminal charges had been filed, the Cayuga Nation brought a declaratory judgment action against the DAs to seek a ruling that they were not obligated to collect taxes since the state statute had not been put into effect. Cayuga Indian Nation of N.Y. v. Gould, 930 N.E.2d 233 (N.Y. 2010).   They also sought an injunction to bar tax evasion charges against the Nation or its employees until a system for calculating and collecting taxes is implemented by the Department.  The DAs sought summary judgment granting them power to enforce the tax law because the land on which the stores were located was not part of a “qualified reservation” according to New York tax law and the Nation could not claim sovereign power over the property.  The court ruled for the DAs and the Nation appealed.

The case was appealed all the way to the Court of Appeals, which ultimately held in a split decision that New York can collect sales tax for goods sold to non-Native Americans on reservation property if an appropriate mechanism is in place.  However, the mechanism must not be overly burdensome.  Since no mechanism was in place, the tribes were not obligated to collect the tax. On June 28th, 2010 a Seneca County judge dismissed criminal tax evasion indictments against the tribes related to the case and ordered the return of over $500,000 worth of cigarettes and computers seized in 2008.

To bolster revenue collections, New York enacted legislation on June 10, 2010 essentially codifying the 2006 regulatory scheme that was never enforced.  On June 22, 2010, the NY Department of Taxation adopted emergency regulations scheduled to take effect on September 1, 2010.  Estimates vary as to how much revenue will be collected.  The New York Senate claims in its justification for the new law, “New York forfeits an estimated $1 billion each year in uncollected taxes from cigarette sales to non-tribal members on Native American reservations.”  Lower estimates of between $150 and $440 million are reported by other sources.

Under the new collection scheme all cigarette packs sold in New York State would bear tax stamps, and all wholesale distributors would prepay taxes when they purchase the stamps.  Native American Nations would obtain tax-free cigarettes for the use of their tribal members by either participating in a coupon system or a prior approval system.  Both systems are based on the annual probable demand of cigarettes by qualified tribal members.

The Department has determined probable demand using a formula incorporating U.S. Census tribal population data and federal government data on the average annual per capita consumption of cigarettes.   For example, the Cayuga tribe, with a population of 947, is allocated 80,400 tax-free packs per year. 20 NYCCR §§ 74.6, 74.7.

Participants in the coupon system would receive quarterly allocations of coupons which they will present to wholesalers allowing them to purchase tax stamped cigarettes tax-free.  In turn, the wholesalers would present the coupons to the Department to receive refunds for the prepaid sales taxes.

The prior approval system will require wholesale dealers or agents to obtain approval from the Department before they may sell untaxed cigarettes to Indian Nations.  The Department will monitor the system to ensure sales do not exceed authorized probable demand quantities.  No system of prior approval is yet in place, though the Department contemplates an interactive Web application.

Spokespersons for Native American retailers reacted angrily to the new legislation, calling the new tax collection scheme “an act of war” and “a deliberate effort to sabotage federal treaty rights and rape our economy to bail out New York State.”  Multiple lawsuits were filed to prevent the new tax regulations from taking effect on September 1.

Between October and November of 2010, Judge Richard Arcara of the Western District of New York denied motions for preliminary injunctions in two separate cases brought by New York tribes.  In reaching these decisions, Acara concluded that “the Nations’ right of tribal sovereignty is not unconstitutionally burdened by implementation of the tax law amendments.”   Seneca Nation of Indians, No. 10-CV-687A, 2010 WL 4027796, at *17 (W.D. N.Y. Oct. 14, 2010). Conversely, on October 14, 2010 Judge Hurd of the Northern District ruled in favor of the Oneida tribe in a similar case. Oneida Nation of N.Y. v. Paterson, No. 6:10-CV-1071, 2010 WL 4053080, at *13 (N.D. N.Y. Oct. 14, 2010). Following conflicting decisions in the Northern and Western districts, a temporary stay order was granted which prevented tax collection from taking place until the Second Circuit Court of Appeals could consider the matter on consolidated appeal. Seneca Nation of Indians, No. 10-CV-687A, 2010 WL 4027795, at *4 (W.D. N.Y. Oct. 14, 2010).

On consolidated appeal, the Second Circuit held that New York’s interest in closing the loophole in its cigarette tax scheme outweighed tribal economic interests in selling tax-free cigarettes on reservations to non-members. Oneida Nation of New York v. Cuomo, Nos. 10-4265(L), 10-4272(con), 10-4598(con), 10-4758(con), 10-4477(XAP), 10-4976(XAP), 10-4981(XAP), 2011 WL 2337372, at *16 (2d Cir. May 9, 2011). Tribal officials responded to this unfavorable outcome by seeking a temporary restraining order from the New York court system to block immediate implementation of the tax system and also requesting a preliminary injunction against implementation. The temporary order was granted but on June 8, 2011, the New York Supreme Court ruled that the state could commence tax collection. Seneca Nation of Indians v. New York State Dept. of Taxation and Finance, No. 2011-0000714, 2011 WL 2436815, at *5 (N.Y. Sup. June 8, 2011). On appeal, the Appellate Division also denied the request for a preliminary injunction and vacated the temporary restraining order, allowing New York to finally collect taxes on cigarette sales made to non-members on reservations.

New York State has now begun to implement its tax collection system.  For more information from the New York State Department of Taxation and Finance, visit http://www.tax.ny.gov/bus/cig/cigind_report_sales.htm.